What Is a Mixed Economy? Pros, Cons and Examples

A mixed economy is one in which both private and public enterprise occur. And, it is often a mix of free market and central planning.

According to recent reports, the American economy appears to be booming.

Not only is the stock market arguably in one of the longest bull runs in history, but unemployment is low (sitting at around 4% – the lowest in years), exports are increasing, and second quarter  gross domestic product (GDP) numbers are promising. And while many would caution against the possible short-lived nature of the current economic boom, it is nonetheless apparent: the American economy is having a moment.

But, what kind of system has allowed America to enjoy the recent (if not short-lived) strong numbers? Cue the mixed economy.

While there are other kinds of economies like the command, traditional, or market economy, the mixed economy has famously been successful in balancing public needs with private incentives and has led to some of the strongest economies in the world. But, what actually is a mixed economy, and what are some of the pros and cons?

What Is a Mixed Economy?

Put simply, a mixed economy is a system wherein both public and private enterprise occur. So, essentially, private producers and government endeavors are operating in tandem in the economy. In some sense, a mixed economy thus combines both a socialist and capitalist approach to the economic marketplace – by allowing the government to provide enterprise in areas like health care or aerospace while simultaneously allowing private producers or companies to engage in production and competition in the marketplace.

In a mixed economy, entrepreneurs, businesses and corporations are allowed to pursue their best interests in the market, while government or public programs, organizations, and enterprises are equally permitted to provide services and the like in the market, as well as intervene in areas like trade or taxes.

What Are the Pros and Cons of a Mixed Economy?

While there certainly are many proponents of mixed economies (and the numerous benefits they provide), there are some critics as well. So, what are the pros and cons of a mixed economy?

Pros of a Mixed Economy

One of the obvious benefits of a mixed economy is that the free market aspect allows prices of goods to be determined by supply and demand. Additionally, resources, goods and services are therefore directed where they are most useful.

Another advantage of the mixed economy system is its capitalist approach to rewarding the hardest workers or the most efficient enterprises in the market. By providing a pseudo-free market, mixed economies allow the producers with the highest profits to rise to the top and continue generating capital – which, in turn, gives consumers the best prices.

By allowing for competition, mixed economies also foster an environment of innovation and efficiency, having companies compete for creating better products or services for consumers – which will, in turn, benefit the consumers as well as the market. Thus, the most efficient producers are the ones getting the profits and capital to continue creating and innovating cost-efficient ways to satisfy consumer’s needs.

Still, another huge advantage of a mixed economy is that it still focuses on areas like aerospace, defense and technology that a market economy may neglect. In this manner, the government is able to more efficiently develop products and programs in these areas while letting private enterprises focus on other sectors (for the most part).

And, albeit perhaps more controversial, a stronger government presence in the economy ensures those smaller enterprises are not banned from competition due to large conglomerates and prevents widespread monopolies that may present barriers to entry in certain markets.

Cons of a Mixed Economy

However, the mixed economy is by no means a perfect system, as critics have observed.

Even though the government often intercedes to ensure smaller companies have a shot at competition, this isn’t always effective, and the more pure market economy aspects may make it more difficult for producers to compete if they are not among the most successful.

Additionally, just like too little government intervention may harm producers, too much might as well. Some have argued that a mixed economy allows the government itself to monopolize certain industries (like defense), with government-subsidized producers essentially in charge of the sector – which could create more debt for the country and slow economic progress. For example, federal agencies like the National Aeronautic Space Administration (NASA) dominated the aerospace sector – although other private companies are gaining traction, like Tesla (TSLA) – Get Report CEO Elon Musk’s SpaceX.

Another major issue present in a mixed economy is too much government protections like tax breaks or subsidies – or, perhaps most controversial of all, bailouts. Some large corporations can receive special treatment from the government, perhaps disrupting the natural flow of the economy. An example of this is the subsequent bailouts of major banks following the 2008 financial crisis. Large banks or investment firms received tax-payer bailouts once it was clear some of them would fail without the help.

Mixed Economy vs. Other Economies

Still, there are multiple economic systems employed worldwide that utilize different aspects of the market and government alike – whether it be total government intervention or total free market processes.

But, how is the mixed economy different from other kinds of economies?

Market Economy

While a mixed economy combines free market with central government planning and intervention, a market economy relies purely on the free market (and the rules of supply and demand) to regulate the economy.

For this reason, profit motives, incentives, and capitalism are the driving factors of the economy. Examples of market economies include New Zealand and Switzerland, who both have mostly (around 80% each) free markets.

Command Economy

On the contrary, a command economy is one that is run purely by government regulation – determining the prices, producers, and resources of goods. For this reason, unlike a mixed economy, there is virtually no competition in a command economy. Examples of the command economy in action include North Korea and Cuba, who identify as communist countries and control most (if not all) economic activity. Read more about command economies here.

Traditional Economy

Despite being much less common than mixed or market economies, traditional economies are systems that rely on customs and tradition to determine economic activity – such as bartering and reliance on agriculture and gathering.

The majority of traditional economies in 2018 can be found in emerging markets or developing nations like those in Africa or the Middle East. Traditional economies often focus on production and distribution in terms of what is necessary (and often do not create a surplus of goods).

For these reasons, traditional economies have largely been replaced by mixed or market economies in the major economic powers in the world, like the U.S.

Examples of a Mixed Economy

One of the most powerful examples of a mixed economy is the U.S.

As detailed in the Constitution, the U.S. developed an economic system at its founding that protected property rights and prevented overbearing government intervention in business practices.

While the degree to which this has always been followed is perhaps up for debate, the U.S. continues to stick to a mixed economy – and, according to an index – has an economic freedom score of 75.7, which is the 17th freest in the 2018 index.

The U.S. employs a mixed economy by having a large private sector and free market that allows ample competition and employs efficiency and innovation to produce products, while also utilizing government central planning in certain areas like health care or in taxing corporations (among other capacities) and managing trade. And, while the U.S. government does have somewhat of a monopoly in sectors like defense, private enterprise in areas like technology are picking up, like Amazon (AMZN) – Get Report , Apple , SpaceX and Alphabet (GOOGL) – Get Report .

Still, many have been critical of President Trump’s claim on Twitter (TWTR) – Get Report that “the Economy is booming like never before,” despite promising recent numbers.

Other countries that use a mixed economy include France and the United Kingdom, who both use a mixture of government intervention and free markets.